Depreciable Property

Cases

characterization of depreciable property or inventory done on annual basis

The taxpayer leased or entered into leases by it of flight simulators it had manufactured. For financing reasons, it entered into sale and leaseback transactions under which the simulators were sold to a bank, leased to the taxpayer, and subleased to an airline.

In finding that the gains realized on the sale to the bank were on capital account, Noël JA first noted (at para. 34) the taxpayer's submission that "it could never have made a profit from these sale-and-leaseback arrangements, since the leasing costs it agreed to pay always exceed the proceeds from the disposition of the simulators"), and then stated (at para. 69):

[T]he leasing component of the sale-and-leaseback arrangements extended over a period of twenty and twenty-one years and allowed the appellant to carry on its leasing/service business. The fact that sale-and-leaseback arrangements make no business sense unless the rental/service fees that the appellant planned to collect are taken into account shows that the transactions were concluded on the basis of the ongoing operation of the simulators over the life of the lease. ... It follows that the sale-and-leaseback transactions were not part of the appellant's trading operations.

In the case of simulators which had already been leased to Air Canada under agreements which gave Air Canada a right to purchase "upon mutually acceptable terms," this merely created an invitation to negotiate, without the effect of putting those simulators up for sale, so that they retained their character as capital property. However, an option on another simulator granted to United Airlines (and a similar option granted to Airbus) "was a real option as it could be exercised for a preset price" (para. 107) and had the effect of making the simulators inventory, so that they did not qualify as depreciable property by virtue of Reg. 1102(1)(b). Noël JA stated (at para. 108):

Property put up for sale in the course of a business carried on for that purpose is no less for sale because circumstances make a sale unlikely.

The Court affirmed the trial judge's finding that the characterization of property as inventory or capital property is to be done year-by-year (para. 72).

Bosa Bros. Construction Ltd. v. The Queen, 96 DTC 6193 (FCTD)

Prior to the acquisition by the taxpayer of the shares of another taxable Canadian corporation ("Topaz"), Topaz acquired from its then parent ("Darwai") an apartment building having a fair market value lower than its cost amount to Darwai.

Nadon J. found on the evidence that Darwai had claimed, and Revenue Canada had allowed, the deduction of capital cost allowance on the apartment building. Accordingly, it followed that s. 85(5.1) applied to maintain the cost amount of the property to Topaz (with the result that Topaz, prior to its winding-up into the taxpayer, was able to claim a non-capital loss from an inventory write down of the apartment building).

The Quebec taxpayer leased various vehicles. It had possession and use of the trucks, it had assumed all risks, it had the option to purchase the vehicles, six months before the expiry of the lease, for an amount approximately equal to the fair market value of the remaining lease payments, and it was required to pay the "rent" even if the vehicles were destroyed or it no longer had the use of them. In finding that the taxpayer was not entitled to claim capital cost allowance in respect of the vehicles, Tremblay-Lamer J. found that the purchase options did not give the taxpayer any ownership of the vehicles and, therefore, they did not qualify as depreciable property. (In considering the eligibility of the taxpayer for investment tax credits, Tremblay-Lamer J. went on to find that because it was not obliged to exercise its options to purchase, it had not acquired the vehicles prior to the exercise of the option.)

Kettle River Sawmills Ltd. v. The Queen, 92 DTC 6525 (FCTD)

status does not turn on whether CCA actually claimed

A timber resource property constituted a depreciable property notwithstanding that the taxpayer had not claimed any capital cost allowance in respect of the property. Strayer J stated (at p. 6531):

[T]he plaintiffs were entitled to claim depreciatin and if they deducted the licence espenses as current income expenses...this does not alter the legal chracterization of the timber resource properties as "depreciable property".

Crown Cork & Seal Canada Inc. v. The Queen, 90 DTC 6586 (FCTD)

not yet depreciable property if not usable

At the request of the taxpayer, the vendor of equipment purported to pass title in the equipment to the taxpayer in its 1979 taxation year. However, the equipment at that point was a "mass of metal" which was not yet suitable for the taxpayer's manufacturing operations. Accordingly, the taxpayer had not acquired a Class 29 asset in its 1979 taxation year:

"That which the taxpayer acquires must be the asset upon which it is permitted to deduct capital cost allowance and not mere components to go with that which has not yet been developed." (p. 6592)

The taxpayer did not acquire title to a roadpaver until after its taxation year-end of March 31, 1977 because the sale did not receive written approval of the vendor until April 11, 1977 (the sales order stated it was subject to the written acceptance of the Vendor), because the roadpaver was not delivered until May 25, 1977 (the contract specified that the roadpaver was to be shipped F.O.B. Saskatoon) and because the contract specified that property was not to pass until full payment was made, which did not occur until June 14, 1977 (an initial cheque having been given on March 30, 1977). In addition, since the taxpayer did not have possession or use of the machine until the delivery date, it had not acquired the incidents of title by year-end. Therefore, it had not "acquired" the roadpaver by year-end.

The taxpayer constructed a new pipeline. In order that any crude oil could be delivered at the end of the pipeline, it was necessary that the pipeline first be filled with crude oil (the "initial linefill"). In finding that the (continually replenished) linefill qualified as Class 8 property of the taxpayer, Cullen J stated (at p. 6065):

The plaintiff is at all times the owner of linefill even though all of the "initial linefill" is displaced by the shippers' oil, the linefill remains for all practical purposes the same product.

The taxpayer executed on December 29, 1971 conditional sale contracts with a dealer for the purchase of 10 Caterpillar tractors which were then at the manufacturer's premises in Peoria. Under the conditional sales agreements the taxpayer was obliged to insure the tractors against risks, thereby evidencing that risk of loss had passed to the taxpayer, and the taxpayer "had the right to use the tractors and could have taken delivery of the tractors at Peoria if it had had any use for them in that vicinity. It follows that all the incidents of ownership other than legal title reserved in the vendor ... such as possession, risk and the right to use the tractors" had been acquired by the taxpayer, and it was entitled to claim CCA in respect of the tractors for its year ended December 31, 1971. [C.R.: 13(21)(f)(i)]

The Queen v. Kimmel, 76 DTC 6259, [1976] CTC 443 (FCTD)

Both the purchaser and vendor of an apartment building wished to close in December 1968. However, the trustee who held the registered title refused to deliver a conveyance of the land until January 24, 1969, after the vendor was sued on January 14, 1969 for damages. The sale closed on January 24, 1969 on precisely the terms that had been established on December 23, 1968 in the amended agreement of purchase and sale, with adjustments as of December 15, 1968. Mahoney, J. held that the action for damages did not constitute a repudiation of the old contract and its replacement by a new contract, and the purchaser was entitled to claim capital cost allowance on the property for his 1968 taxation year. [C.R: 54(c)]

The taxpayer acquired machinery by having a rental company make the purchase and then entering into various leasing agreements with the rental company containing an option to purchase the equipment for $1, for 5% of a relatively minor amount otherwise owing under the lease or for the balance owing under the lease. The total cost of the rentals excluding the interest and administrative fee components was equal to the market price of the machinery. Décary, J. held that the taxpayer had purchased the machinery at the inception of the leases, and accordingly was not entitled to deduct the rental payments as such. [C.R.: 212(1)(d); Ownership; 54(c)]

See Also

The taxpayer bought units in a limited partnership, which was to acquire a large yacht to be used for catered vacation charters. The general partner ("OCGC") purchased a smaller yacht (the S/Y Garbo) to be used for the provisioning of supplies to an envisaged fleet of yachts for the partnership in question and 35 others, which were never acquired. The purported business plan for the 36 partnerships represented a "Ponzi-like scheme [which] was set to collapse eventually" (para. 344, see also 356).

In finding that no capital cost allowance could be claimed by the partnership in question in respect of the S/Y Garbo, Rossiter ACJ found (at para. 402) that OCGC did not acquire title in the interest of the partnership.

inventory converted to depreciable property when leased and converted back on lease maturity

The taxpayer purchased farm equipment from a corporation ("Case") for sale or lease. to farmers. In the case of a lease transaction, it entered into a lease of the equipment from a leasing company affiliate of Case ("Case Credit") at the same time as the taxpayer, in turn, leased the equipment to a farmer, generally for a term of five years. Case Credit held title to the equipment as security for the payment of lease payments by the taxpayer to Case Credit. In 75% of the leases with farmers, the farmers did not exercise their option to purchase the equipment on completion of the lease, in which event the taxpayer would sell the equipment.

Bowie J. found that the equipment was converted from inventory to capital property in the taxpayer's hands when the equipment commenced to be leased to a farmer, and it again changed character and became inventory once again when the equipment became available for sale by the taxpayer at the conclusion of the lease. He stated (at para. 8):

The characterization of an asset as inventory or depreciable capital asset may change from time to time depending on the circumstances, and in particular, the use to which the unit is being put at a given time: see Plaza Pontiac-Buick ... Canadian Kodak Sales ... . Equipment of which the appellant has taken possession and which is available to be sold or leased is properly treated as inventory. When it is either sold or leased, it is no longer available to be disposed of, and it ceases to be inventory.

Under these arrangements the taxpayer was found to be the beneficial owner of the equipment notwithstanding the holding of title by Case Credit. Accordingly, the taxpayer was eligible for investment tax credits in respect of the equipment.

Gordon v. The Queen, 95 DTC 493 (TCC)

A film that was described in evidence as being over 50% complete was found to be depreciable property described in Class 10 given that it was acquired on capital account for an income-producing purpose and given that it had a readily discernable comedy plot, appropriate sound, a beginning, and a developing sequential story, and it had reached the state where it could be shown to professional marketers through a videotape medium. Furthermore, even if it did not qualify as a "motion picture film", then, as an incomplete film, it would qualify as tangible property and, therefore, as a Class 8 property.

Re Cronin Fire Equipment Ltd. (1993), 14 OR (3d) 269 (Ont. Ct. (G.D))

At the request of a customer ("Cronin"), a corporation ("Transportaction") acquired motor vehicles from a dealer, and then entered into agreements (styled as motor vehicle lease agreements) with Cronin. The leases could be terminated after six months by either party. Following termination of the lease, Transportaction was to sell the returned vehicle. If the net sale proceeds exceeded the termination book value, Transporataction was required to pay Cronin the excess; whereas if the net sale proceeds were lower, Cronin was required to pay the deficiency to Transportaction except to the extent that the net sale proceeds were less than 20% of the termination book value.

Rosenberg J. found that there was only a "remote possibility" that a vehicle would be sold for less than 20% of the termination value, and found that "the result of the lease agreement was that effectively all benefits and risk of ownership of the vehicle were transferred to Cronin" (p. 273). Accordingly, the lease in substance created a security interest which was unperfected on the date of bankruptcy of Conin.

Laurent Goulet & Fils Inc. v. MNR, 92 DTC 1611 (TCC)

At the time the taxpayer contacted the lessor ("Hewitt") of equipment to it that it wished to exercise the purchase option, Hewitt suggested another institution ("Lafleur") as a source of financing the purchase. Accordingly, the taxpayer entered into a lease with Lafleur.

In finding that the taxpayer did not acquire the equipment pursuant to the lease with Lafleur (and therefore, was not eligible for an investment tax credit under s. 127(5)), Tremblay TCJ. noted that one clause of the lease provided that "ownership of all vehicles leased shall remain with the lessor, and said vehicles should be registered in the lessor's name"; that another clause provided that at the expiry of the contract the lessor (Lafleur) was required to attempt to arrange the sale of the vehicle, with any shortfall to be paid by the taxpayer, and any excess to be refunded by Lafleur; and that a transfer of ownership took place between Hewitt and Lafleur.

Location Gaétan Lévesque Inc. v. MNR, 91 DTC 1380 (TCC)

The taxpayer entered into "leasing contracts" respecting heavy equipment which typically had a term of approximately five years, provided for monthly rental payments, provided that five months before the expiry date the taxpayer could exercise an option to purchase the equipment for a sum equal to the remaining rentals, and provided that the taxpayer was responsible for the maintenance and good condition of the equipment.

"A taxpayer's depreciable property is property for which he or she has already claimed and received deductions, and in respect of deductions for the current year, it is property which the taxpayer owns at the end of the year."

Furthermore, she found (at p. 1385) that "the words 'property acquired' must be taken to mean property in which the taxpayer has a right of ownership, or if not such a right, then all the attributes of a right of ownership, as in the case of a conditional sale". Accordingly, because the taxpayer neither owned the property nor had acquired it, it was not entitled to capital cost allowance.

Westcon Engineering and Contractors Ltd. v. MNR, 77 DTC 284 (T.R.B.)

The taxpayer leased three forklift trucks and two trucks which it was entitled pursuant to options to purchase on the expiration of the leases either for the sum of $1 or (in the case of two items) for 5% of the original cost. Given the lack of evidence as to the fair market value of the trucks at the time of exercise by the taxpayer of its options, Mr. Prociuk affirmed assessments the Minister had made on the basis that the lease agreements represented conditional sales contracts.

C.R. Stewart Equipment Ltd. v. MNR, 77 DTC 176 (T.R.B.)

Rent payments made by the taxpayer pursuant to crane rental lease agreements with a term of six months and purchase options for more than a nominal amount, were found to be fully deductible given that only one of the six factors described in former IT-17 was applicable in this case. After noting that the only potential evidence of the fair market value of the cranes was the capital cost allowance rates applicable to Class 10, Mr. Taylor stated (at p. 181):

"It does not appear to the Board that any reasonable calculation of 'probable fair market value', based on such ... depreciation schedules would show the option purchase price for either crane to be so low that it could not possibly be turned down by the appellant, and that, therefore, at the date of signing the lease agreements, purchase of the cranes would be a foregone conclusion."

Chibougamau Lumber Limitée v. MNR, 73 DTC 134 (T.R.B.)

The taxpayer leased equipment from finance companies generally for a term of 36 months and with the option to acquire the equipment on expiry of the lease for $1. Before finding that the lease agreements were "shams" and that the legal substance of the contracts were purchases of the equipment on a time-payment plan, Mr. Flanigan referred to evidence that the equipment was worth at least $40,000 and stated (at p. 137) that "it would strain the credulity of the Court to believe, that an internationally successful company would convey to a stranger at a nominal price an asset worth such an amount".

Marine Midland Bank v. U.S., 687 F (2d) 395, 231 Ct. Cl. 496

Contracts of the taxpayer with the U.S. Air Force and Navy for the production of munition trailers stipulated that title would "forthwith vest" in the U.S. government upon the making of progress payments. The court held that although the government purported to acquire title to the property, in fact it acquired only a lien to secure the progress payments it made (which were viewed by the Court as being repaid as a deduction from the amounts due upon final performance). "[I]t would do violence to the system that the clause and regulations set up to say that the government 'owns' covered property when it is apparent that the government specifically exempts itself from most of the incidents of ownership."

Helby v. Matthews, [1895] A.C. 471 (HL)

A piano was let on hire on the basis that the hirer was to pay a monthly rent, could terminate the hiring by delivering the piano to the owner without being responsible for any future payments, and became the owner of the piano upon making all 36 monthly instalments. In finding that this contract was not an agreement of sale, Lord Herschell L.C. noted (at pp. 476-477) that although it was "very likely that both parties thought it would probably end in a purchase", this did not establish that there was a sale agreement given that one could very well conceive of cases in which a person who had not made up his mind to continue payments for three years would nevertheless enter into such an agreement. Lee v. Butler, [1893] 2 Q.B. 318 was distinguished on the basis that, there, as soon as the agreement was entered into, there was an absolute obligation to pay both instalments, with no ability of the person who obtained the goods to insist upon returning them and thereby absolve himself from any obligation to make further payments.

Accordingly, a pledging by the hirer of the piano with a pawnbroker did not defeat the owner's rights.

Administrative Policy

In 2019-0799241E5 F, CRA corrected Section 3.2 (3rd paragraph) by indicating that property taxes and home insurance costs of a home office generally are NOT deductible under ss. 8(13) and 8(1)(i).

In the course of a discussion of the deductibility of home office and automobile expense of an independent contractor where the property is held in co-ownership, CRA stated:

The CRA is of the view that a taxpayer cannot claim capital cost allowance for property that the taxpayer does not own under the applicable private law and in which the taxpayer does not have a leasehold interest.

1.22 … CCA may be claimed by the beneficial owner of a property if that person has all the incidents of title, such as possession, use and risk. …

1.23 … [W]here a taxpayer's asset is incorporated as an integral part into a property owned by another person. In general, CCA cannot be claimed by a taxpayer who does not own or otherwise have a leasehold interest in the property.

Demolished building

1.56 [A] taxpayer might purchase real estate that includes a building and tear down the building relatively soon after the purchase. ... [W]here the building is used to earn income for only a short time prior to demolition, it is likely that the building will not be regarded as depreciable property unless the taxpayer can clearly establish that the prime intention on acquiring the building was for the purpose of gaining or producing income. …

building erected by corporation on shareholder’s land not depreciable property unless shareholder renounces right of accession

Corporation A erected, at its expense and for exclusive use in its transport business, a detached garage on the land on which the principal residence of its individual shareholder (the “Taxpayer”) is located. The land subjacent to the garage is leased to it by the Taxpayer. In finding that Corporation A would be entitled to claim capital cost allowance ("CCA") only if it held the right of superficies to the garage (i.e., by deed it was agreed that the Taxpayer would have no right of accession to the garage), CRA stated:

[A]ssuming that Corporation A is owner by way of superficies of the garage … then the garage, which is used by Corporation A to earn business income, would be depreciable property if the conditions set out in the definition of "depreciable property" … are satisfied.

… Thus, the garage could potentially fall into Class 1(q) of Schedule II of the Regulations. ...

On the other hand, if the taxpayer owns the garage, the taxpayer would not be entitled to CCA because the facts do not allow us to conclude that the taxpayer uses it for the purpose of earning income. Indeed, under paragraph 1102(1)(c) of the Regulations, depreciation is deductible only if the property was acquired for the purpose of gaining or producing income.

A purchase option will not result in the optionholder being considered to have acquired the property where there is no obligation on the part of that person to assume ownership of the property at the expiration of the lease arrangement. "In our view, if a lease is, at law, a lease, then it will be treated as a lease for all purposes of the Act."

IT-464R, para. 3

A leasehold interest is not considered to be a depreciable property until a capital cost is incurred with respect to the property.

27 January 2003 Internal T.I. 2002-017767 -

"It is our position that a taxpayer should not be denied a terminal loss under subsection 20(16) of the Act merely because subsection 1100(11) of the Regulations did not permit the taxpayer to deduct any CCA... . [I]n accordance with the definition of depreciable property in subsection 13(21) of the Act, a taxpayer will be considered entitled to a deduction under paragraph 20(1)(a), despite the fact that the Regulations may have reduced the CCA claimed by the taxpayer to NIL for the period of ownership of the rental property."

Before going on to implicitly treat the lessee of automobile leases as the lessee rather than owner thereof, CRA stated:

In the Income Tax Technical News No. 21 ... CRA ... announced that taking into account the decision ... in Shell Canada ... its position is that, in the absence of a sham, the determination of whether a contract between two parties is a lease agreement or sales contract for tax purposes must be resolved based on the legal relationship created by the terms of the agreement, rather than on any attempt to ascertain the underlying economic reality.

lease under which lessee bore all risk implicitly treated as lease rather than purchase

171

Income Tax Technical News, No. 5, 28 July 1995

Until several cases currently before the courts dealing with the issues pertinent to IT-233R have been rendered, the guidelines in that Bulletin respecting when a transaction structured as a lease will be treated as an acquisition and disposition, will continue to be applied.

93 C.P.T.J. - Q.20

An asset that otherwise meets the definition of CEE or CDE must always have its cost amortized in the form of capital cost allowance rather than as a resource deduction.

30 December 1992 T.I. (Tax Window, No. 27, p. 6, ¶2322)

It is a question or fact whether a taxpayer has acquired a right to use computer software (which is included in Class 12(0)) or a right to market software which will be treated either as a Class 14 property or as eligible capital property.

An outright sale of computer software can occur only where there has been an absolute transfer of all intellectual property interests in the software and where the transferee obtains the non- restricted right to sell or lease the software. An outright sale has not occurred where any party other than the transferee maintains proprietary rights or where the transferee has committed itself to restrictions not normally associated with ownerships such as restrictions regarding secrecy.

90 C.R. - Q.16

Where a transaction is a lease, only the lessor is entitled to CCA. Conversely, where it is determined that the agreement results in a disposition and acquisition, only the party acquiring the property will be entitled to CCA.

88 C.R. - "Finance and Leasing" - "Leasing"

Since CCA accrues only to the owner of the property, where the transaction (having regard to the actual legal rights and obligations of the parties) is a lease, only the lessor is entitled to CCA, and where it is determined that the agreement results in a disposition and acquisition of property, only the party acquiring the property will be entitled to CCA. [C.R.: 54(c)]

Disposition of Property

Cases

The taxpayer (who had an October 31 fiscal year end) followed a practice of purchasing a new fleet of cars from Ford to replace the fleet which it had acquired the previous year. The process of exchanging the cars was initiated and completed within the month of October but the intent of the parties was that title to the old fleet would remain with the taxpayer until November 15, at which point payment by Ford for the old fleet would be effected by way of set-off against the amount payable by the taxpayer for the new fleet.

Noël J.A. found that for purposes of the Act there is no "disposition" (and no acquisition) unless there is a change in the beneficial ownership of the subject property. With respect to a sale transaction, Parliament had specified in s. 13(21)(a) the entitlement which gives rise to a disposition, namely, to the sale price; and the terms "sale price of property that has been sold" are presumed to bear their legal meaning. Accordingly, the old fleet had not been disposed of at year end.

Borstad Welding Supplies (1972) Ltd. v. The Queen, 93 DTC 5457 (FCTD)

In connection with the sale of the taxpayer's business to an arm's length corporation, it was agreed that refillable cylinders would be rented by the taxpayer to the purchaser at, what was found on the evidence to be, a market rate of rent, and that over the subsequent five years, 1/5 of the cylinders would be purchased each year by the purchaser for a stipulated amount.

In accepting the form of the rental agreement, and rejecting the position of the Crown that the taxpayer had disposed of the cylinders on the date of entering into the sale agreement, Reed, J. indicated that the jurisprudence only found there to be a disposition or acquisition of depreciable property, in circumstances where title had not passed, where all the incidents of title had passed except those retained for the purpose of securing payment of the balance of the purchase price. Here, it was the evident intention of the parties that there be an agreement for the rental of the cylinders until such time as they were purchased, and that there is no question of property in the cylinders being retained as security for payment of the purchase price.

The Queen v. Browning Harvey Ltd., 90 DTC 6105 (FCTD)

A manufacturer and distributor of softdrinks entered into agreements with shopkeepers under which: coolers were "sold" to the shopkeepers for $2, $1 of which was payable at the time of execution of the agreement, and the remaining $1 at the end of the seven-year term; title vested in the taxpayer until the second instalment was paid; and the taxpayer had the right to retake possession in the event that the shopkeeper fail to comply with any of several conditions including a requirement that the coolers be used exclusively for beverages of the taxpayer. Martin J. held that there was no disposition of the coolers until the expiration of the seven-year term in light of the limitations placed on the user of the coolers by the shopkeepers, the right of the taxpayer to retake possession in certain events, and the responsibility of the taxpayer for loss or repairs during the seven-year term.

It was held that since the taxpayer, by executing an agreement respecting the ultimate sale by it of apartment buildings, had "completely divested itself of all of the duties, responsibilities and charges of ownership and also all of the profits, benefits and incidents of ownership, except the legal title," the taxpayer had thereby disposed of the buildings.

See Also

A lump sum which the taxpayer received in settlement of an action it brought because a "quench and temper" pipe treatment system that had been installed at its pipe manufacturing plant did not perform to specifications, was an exempt receipt rather than proceeds of disposition of depreciable property. There was no disposition of depreciable property on general principles (as the taxpayer did not abandon or transfer its assets), nor was there "compensation for property injuriously affected" under paragraph (e) of the definition of "proceeds of disposition" given that this phrase referred only to consequential damage to other property where expropriation of a particular property had occurred.

Robert Bédard Auto Ltée. v. MNR, 85 DTC 643 (TCC)

The taxpayer was found to have disposed of its land and building at the same time that it sold the balance of its business to a purchaser when it agreed that the sale of the business was conditional upon the purchaser entering into a lease of the land and building for five years with an obligation to purchase within that period of time for a specified price (with such a lease - purchase agreement subsequently being entered into but made retroactive to the date of the sale of the business).

Freesman v. The Queen, [1982] 2 F.C. 900 (T.D.)

The owner ("Miss Glass") of a car "disposed of" it for purposes of the Customs Act when she entered into an agreement with the plaintiff under which he received a chattel mortgage as security for a loan to Miss Glass, an irrevocable option to purchase the car, the right to sell the car provided it was sold by a certain date and the right in the interim to the car's possession. "Having regard to the control which the [plaintiff] could exercise over the car, including his right to possession and use, there remained in fact and in law very little of the incidents of ownership and title in Miss Glass."

The verb "to dispose" (which should receive the same meaning as the expressions "disposition", "proceeds of disposition" and " disposed of") should be given the broadest possible meaning, and encompasses the idea of destruction or extinguishment. The acquisition by a lessee of the lessor's interest led to the extinguishment or "disposition" of the lessee's leasehold interest for the purposes of Regulation 1100(2) (since repealed). In addition, the transfer of full ownership rights in a building subject to the obligation of the transferee to demolish the building, was a disposition of that building.

There was found to be a disposition or sale of a property by the taxpayer at the time of the closing of the agreement of purchase and sale in 1970, notwithstanding that litigation, in which the purchaser sought rescission, was not finally resolved in favour of the taxpayer-vendor until 1974.

Administrative Policy

CRA noted that "in Sussex Square Apartments, (99 DTC 443) the court concluded that a 'sublease' of the entire term of a lease operates as an assignment, not a sublease, as there is no reversionary interest left in the original tenant. CRA then found that a payment received by Company A from Company B to give up its share of office space under a co-tenancy would be considered to be received by Company A as proceeds of disposition from the sale of a leasehold interest (which would be on account of capital), given that the sublease to Company A was for the entire term of a lease.

A true abandonment of property, for example, where ownership of the property reverts to the Crown or accrues to the first finder and there is no reasonable expectation of recovery by the original owner, can constitute a disposition of property.

92 C.R. - Q.40

Where an investor decides to tear down a building and leave the land vacant, there will be a disposition of the building on demolition.

26 February 1992 T.I. (Tax Window, No. 17, p. 6, ¶1765)

A 99-year lease of residential suites by a condominium corporation to non-members in consideration for substantial up-front payments and nominal annual payments thereafter will be considered to be a disposition. [C.R: 54(c)]

Proceeds of Disposition

Cases

reforestation obligations were not a distinct liability assumed by purchaser

The taxpayer sold the assets of a timber operation (including a timber licence) for a cash purchase price of $169 million, but with the purchase price subject to a corresponding adjustment if a final determination of the value of the obligation of the purchaser to reforest the purchased property (which was an obligation which the province required the purchaser to assume on every such sale) was ultimately determined to be more or less than $11 million. Pursuant to this price adjustment clause, the auditors provided a reforestation statement indicating that in their view, the reforestation liability was approximately $11.2 million, so that cash portion of the purchase price was required to be adjusted by $0.2 million.

The Minister argued that the assumption of these obligations by the purchaser was part of the consideration paid. In agreeing instead with the taxpayer's position that the obligations were intrinsic to the forest tenure being sold, Rothstein J likened the reforestation obligations to "property that is in need of repair" (para. 28), and stated (at paras. 31-32):

The effect of Alberta's scheme is to embed the reforestation obligations into the forest tenure, such that the obligations cannot be severed from the property itself. As such, the reforestation obligations are simply a future cost tied to the tenure that depresses the value of the tenure. ... Under no circumstances could DMI have received [the unencumbered value] for the forest tenure.

This distinguishes the reforestation obligations tied to a forest tenure from a mortgage, which does not affect the value of the property it encumbers.

Rothstein J found (at para. 45) that although the parties had determined the value of the reforestation obligations:

Any amount that the parties assigned to the reforestation obligations in the sale agreement was simply a factor in determining the fair market value of the forest tenures....

Brill v. The Queen, 96 DTC 6572 (FCA)

In finding that the proceeds of disposition for the sale by the taxpayer, following its default to the mortgagee, of its property pursuant to a "Rice Order" of the Alberta Court of Queens Bench was the court-determined sale price of $49,000, Linden J.A. stated (at p. 6575) that determining the proceeds" pursuant to s. 79(c) rather than s. 13(21)(d)(i):

"would not be consistent with the commercial reality of the situation. Normally, the Income Tax Act taxes someone on the basis of what has actually been received, not on the basis of some theoretical formula. The situations meant to be covered by paragraph 79(c) are acquisitions by the lenders in a context where no fixed price is paid, and where it might taken some time to ascertain the true value of what has been disposed of."

The Queen v. Mohawk Oil Co. Ltd., 92 DTC 6135 (FCA)

A lump sum of U.S. $6 million which the taxpayer received from a U.S. supplier in settlement of a claim for loss of profits and unrecovered costs resulting from the failure of a waste oil reprocessing plant to perform as promised did not constitute a non-taxable windfall, and instead constituted a taxable receipt and proceeds of disposition of depreciable property, in the proportions assessed by the Minister.

In rejecting an argument that recapture of depreciation should be reduced to reflect the fair market value of debentures received in consideration for the depreciable property being lower than their principal amount, Pigeon J. noted that s. 20(5)(c) of the pre-1972 Act deemed proceeds of disposition of the property to include the sale price, which was equal to the principal amount of the debentures.

The taxpayer disposed of depreciable property to a corporation controlled by him in consideration for the assumption of a mortgage and the issuance of common shares having a stipulated value that was substantially less than the amount for which they were sold shortly thereafter by the taxpayer. The proceeds of disposition of the depreciable property were found to approximate the fair market value of the property, as established by the subsequent transaction, rather than being based on the stipulated consideration.

See Also

Each year the taxpayer took delivery of a new fleet of automobiles from the vendor (Ford) for use by the taxpayer's employees and transferred possession of the previous year's fleet to Ford or an auctioneer acting for Ford. Although the intention of the parties was to transfer property in the automobiles to Ford on November 1 of each year (i.e., after the taxpayer's October 31 year end) in order that high undepreciated capital cost balances would be maintained by the taxpayer as at October 31, there had been a disposition of the old fleet in October because by October 31, the taxpayer had an unconditional entitlement to enforce payment of the purchase price for the old fleet vehicles: "Inspections were complete; vehicles were in a deliverable state; the price was fixed; and, possession had been transferred. Even the diligently followed arrangement to meet on October 31st each year to ensure registration and passage of legal title on November 1st, had the effect of absolutely and unconditionally crystallizing Ford's obligations to pay HP for the old fleet before the end of the day" (p. 1341)

Although the provision in the definition of undepreciated capital cost providing for a reduction referred to a "disposition before that time of property" rather than using the defined phrase "proceeds of disposition", no other conclusion could be drawn but that "Parliament, in defining 'disposition of property' intended an express directive not to leave the timing of dispositions for CCA purposes solely to the expressed intentions (or even manifestly clear, self-evident incredibly attested to intentions) of the parties to an agreement of sale." (p. 1342)

Kamsel Leasing Inc. v. MNR, 93 DTC 250 (TCC)

After a customer had negotiated the purchase price with a supplier, the taxpayer would purchase equipment from the supplier and enter into a net lease with the customer that typically had a term of 36 months and (under a collateral arrangement that generally was not written into the lease terms) gave the customer the right to acquire the equipment at 10% of its actual cost on expiry of the lease. Sarchuk TCJ. found that the arrangements of the taxpayer with each lessee (which were treated under GAAP as a direct financing lease) should be characterized as a sale and financing rather than as an operating lease for tax purposes given that "the option permitted a lessee to acquire the property at a price which at the inception of the lease was such that no reasonable person would fail to exercise, and indeed the evidence was that a substantial percentage of the lessees exercised the option" (p. 253).

Tri-Star Leasing (London) Inc. v. MNR, 92 DTC 1786 (TCC)

Before finding that leases of equipment made by the taxpayer should be characterized as such rather than as conditional sales agreements, as submitted by the taxpayer, Sarchuk J. stated (p. 1789):

"There was, as I see it, no enforceable right during or at the expiration of the lease, to acquire the property at a price which at the inception of the lease is substantially less than the probable fair market value of the property at the time of permitted acquisition by the lessee, nor can it be said that the lessee had the right, and by this I mean enforceable right, during the lease or at its expiration to acquire the property at a price which the lessee knew at the inception of the lease was such that no reasonable person would refuse."

Robert v. MNR, 90 DTC 1281 (TCC)

After litigation between the taxpayers, who had interests in a MURB project, and the manager of the project, in which the manager alleged that the taxpayers were responsible for operating losses incurred with respect to the project, a settlement was reached pursuant to which the taxpayers and the manager each released the other from all claims, and the taxpayers conveyed their interest in the project to the manager pursuant to an offer to purchase which provided for the payment of $1 plus the assumption by the manager of mortgages. Lamarre Proulx J. held that the taxpayers' proceeds of disposition included the indebtedness assumed by the manager, but did not include the amount of the operating losses which, prior to settlement, the manager had been claiming from them. "Since the claim did not proceed in court and the resale of the building put an end to all such claims, I consider that it is not for me to put any value on these mutual releases, and in any event I could not do so."

Terry v. MNR, 74 DTC 6017, [1973] CTC 837 (FCA)

Two companies after the sale of their operating fleets of vessels avoided recapture of depreciation by selling the proceeds of disposition to other companies.

Ages v. MNR, 71 DTC 86 (TAB)

A partnership agreed to lease real estate under a lease that ran for 25 years, that provided for a yearly rental of $27,396 payable in monthly instalments, and that provided that during a period of approximately five years beginning shortly after the commencement of the lease, the lessee was entitled to acquire the property for a price equal to $710,000 minus 30% of all payments previously made under the lease. Mr. Fordham found that the exercise of this option over two years after the commencement of the lease could not result in 30% of the rent payments received up to that date being excluded from the taxpayer's income and stated (at p. 87):

"I know of no authority for the proposition that money received as rent initially can later be treated ... as having been paid on capital account by reason of a subsequent happening."

Schouten v. MNR, 63 DTC 397 (TAB)

The taxpayer, which operated a fishing camp on land leased from the Crown, was unable to obtain the consent of a secured lender to a sale of that business. Accordingly, the taxpayer entered into a form of sublease agreement with the purchasers which provided that the property would be sublet to the lessees for one year at a rental of $10,000 and that the lessees would have the option to purchase the property for $80,000, with the $10,000 rental being applied to the purchase price.

Mr. Fisher accepted the taxpayer's evidence that the transaction was intended to be a sale. Although the purchasers never in fact exercised their option, it was necessary to consider the situation as it initially existed. Accordingly, the $10,000 received by the taxpayer was a capital receipt.

Marcotte v. MNR, 60 DTC 519 (TAB)

A "lease with promise of sale" between the taxpayer and the supposed lessee was found to be an agreement of sale given that its terms were fully consistent with a contract of sale, including the fact that the consideration was structured in the same manner as instalment payments, with provision being made for the separate payment of interest thereon, and in light of provision for conveyance of the property (a motel) to the lessee for $1 on payment of all the instalments. The only reason for the transaction being styled as a lease was a requirement to discharge a mortgage on any sale of the property. Accordingly, the instalment payments represented tax-free capital receipts.

Foster v. M.N.R, 51 DTC 232 (ITAB)

Mr. Monet found that an agreement styled as a "lease and option to purchase" in fact was an agreement for the sale of a hotel and related assets by the taxpayer in light of the terms of the lease agreement (the lessee was responsible for all municipal taxes and for insuring against damages and assigned the policy to the taxpayer as security for the payment of sums payable under the agreement; the lessee could prepay sums payable under the agreement; and the lessees had the right to obtain a gratuitous transfer of the lands at the expiration of the term) and in light of the other evidence given (the taxpayer stated that there had never been any question of a rental; and the lessee, after taking possession, spent at least $2,000 in alterations and improvements to the buildings). Accordingly, the rent payments received by the taxpayer were tax-free capital receipts.

Administrative Policy

The 2014 Alberta CPA Roundtable, Q,1 indicated that the Daishowa principle applied to the resource industry. Since all industries are subject to environmental laws with an arguably "embedded" environmental liability, why does this principle not extend to other industries? CRA responded:

[R]eclamation obligations in the mining and oil and gas industries are very similar to reforestation obligations: both require the owners of the exploitation rights or the forest tenures to return the related property to its original condition. The SCC also implied, in obiter dicta, that its decision could apply to reclamation obligations in the mining and oil and gas industries. …

… It is CRA’s position that reforestation obligations in the forest industry and reclamation obligations in the mining and oil and gas industries are generally embedded in the related tenures or rights, as they cannot usually be severed and would therefore depress the value. Furthermore, the CRA’s position does not generally extend to sales transactions outside the resource industries but we are willing to consider fact situations on a case by case basis. It remains our position that the Daishowa case does not apply where there is a distinct, existing liability, as opposed to an embedded obligation.

Where an early buy-out occurs under a lease that does not permit early buy-outs, with the result that the lessor receives amounts in excess of the net lease receivable balance, such excess will constitute income to the lessor rather than being credited to its undepreciated capital cost balance.

93 C.R. - Q. 42

Although specific references made in the definition to the reduction in a liability to a mortgagee, this provision is not all-inclusive and a security arrangement containing provisions regarding the power to sell property that are similar to those found in mortgages will be treated in the same fashion.

Paragraph (c)

Cases

The compensation referred to in what now is s. 13(21)(d)(iii) is an amount received or receivable from a third person who has damaged, destroyed, taken or injuriously affected the taxpayer's property. The taxpayer did not receive "compensation" for its building after agreeing to sell its premises "clear of all buildings".

Zeal and Gold Ltd. v. MNR, 73 DTC 5116, [1973] CTC 129 (FCTD)

Although the taxpayer had not made proof of loss by the end of the taxation year in which its property was destroyed by fire, by that time one of the insurance companies had admitted liability and had made an offer to pay the full amount of the coverage. That amount accordingly became payable in that taxation year.

Paragraph (e)

Cases

A lump sum which the taxpayer received in settlement of an action it brought because a "quench and temper" pipe treatment system that had been installed at its pipe manufacturing plant did not perform to specifications, was an exempt receipt rather than proceeds of disposition of depreciable property. There was no disposition of depreciable property on general principles (as the taxpayer did not abandon or transfer its assets), nor was there "compensation for property injuriously affected" under paragraph (e) of the definition of "proceeds of disposition" given that this phrase referred only to consequential damage to other property where expropriation of a particular property had occurred. The lump sum also was not proceeds of disposition under (f) of the definition as no property of the taxpayer had been damaged.

Timber Resource Property

Cases

A perpetual tree farm licence of the taxpayer was replaced by a 25-year licence as required by a new statutory regime. Shortly thereafter, the taxpayer disposed of the replacement licence.

Sharlow J.A. declined to follow an obiter dictum in the Kettle River case that suggested that in determining whether a timber cutting right is an "original right" for purposes of (b) of the definition of timber resource property, the conditions imposed by subparagraph (a)(ii) were retained, i.e., in this context, the original right must have been renewable rather than perpetual. Accordingly, the replacement licence of the taxpayer qualified as a timber resource property.

Rights of B.C. timber operators to cut timber in designated areas up to an allowable limit which they acquired well before 1974 nonetheless constituted timber resource properties because those rights were renewed after May 6, 1974. Accordingly, proceeds of disposition referrable to those rights were required to be taken into account under s. 13(1). Hugessen J.A. affirmed the finding of Strayer J. that the allowable annual cut or quota was not a right or interest that was distinct from the timber licences held by the operators, and further held that the effect of the parenthetical exclusion in s. 13(21)(d.1)(i)(A) for an acquisiton in the manner referred to in subparagraph s. 13(21)(d.1)(ii) indicated that an extension or renewal constituted an "acquisition" and that an original right for purposes of s. 13(21)(d.1)(ii) could be acquired before May 7, 1974.

Administrative Policy

an Alberta coniferous tree-harvesting right was a timber resource property

A coniferous timber quota was received from the Alberta Government in 1967 (the “Original Quota”) that entitled the holder to harvest coniferous timber in periodic cuts adjusted to the annual allowable cut of coniferous timber. An additional coniferous timber quota was acquired sometime in 2004 (the “Additional Quota”) and the two quotas later were assimilated to each other (the “New Quota”). At all relevant times, in the ordinary course of events, it was reasonable to expect that the Original Quota, the Additional Quota and the New Quota, as applicable, would be renewed or extended, or that another right or licence could be acquired in substitution therefor. What is the tax treatment of the proceeds of disposition (prior to 2017)of the New Quota?

After noting that “if the New Quota is a timber limit or a timber resource property, it will not be an eligible capital property,” and that although “timber resource properties are expressly excluded from capital gains treatment by virtue of subparagraph 39(1)(a)(iv),” as “there is no similar exclusion for timber limits or cutting rights, the disposition of a timber limit or cutting right that is not a timber resource property may give rise to a capital gain,” and after reviewing the timber resource property definition and the absence of capital gains treatment therefor, CRA stated:

Based on jurisprudence ... and the facts and assumptions described above, the New Quota (whether it is viewed as a single property or a combination of two properties) would qualify as a timber resource property pursuant to the definition of that term in subsection 13(21).

On this basis, the New Quota would not be an eligible capital property and instead the tax consequences described above with respect to timber resource properties would apply with respect to the disposition of the New Quota.

Undepreciated Capital Cost

A

Cases

In December 1991 the taxpayers (who were Canadian residents) acquired most of the partnership interests in a U.S. partnership ("Klink") that had been formed approximately 12 years earlier and whose principal asset, in December 1991, was an IBM mainframe computer which originally had cost U.S.$3.7 million but which had a current fair market value of $5,000. Klink then transferred the computer to a recently-formed British Columbia limited partnership in consideration for a partnership interest therein.

After stating (at para. 44) that the object and spirt of the recapture and terminal loss provisions "is to provide for the recognition of money spent to acquire qualifying assets to the extent that they are consumed in the income earning process," Noël J.A. found (at para. 50 that:

"The only cost which the Act provides for in the present fact situation is the original or full cost, and I do not believe that I could read into the Act the type of modification incorporated by the 1994 addition of paragraph 96(8) to alter this result without infringing on the role of Parliament."

Fletcher Challenge Canada Ltd. v. The Queen, 2000 DTC 6437 (FCA)

no cost because no exchange

Following an amendment to the Forest Act (British Columbia) which gave holders of existing timber rights and privileges the entitlement to replace their existing rights with new timber licences governed by the new provisions of that Act, the taxpayer exercised this right of replacement to obtain replacement licences that covered identical areas subject to the terms of the same tree farming licence. In rejecting a submission of the taxpayer that it had given up previously-granted licences to obtain the newer licences, thereby establishing a cost for the replacement licences equal to the value of what it had exchanged, Desjardins JA stated (at p. 6442) that the taxpayer:

"has not given up anything to get the replacement licences. Sections 20 and 33 of the Forest Act make it clear that the original licences were made to expire by statute and require that the replacement licences be issued automatically."

The taxpayer entered into contracts for the leasing to it by finance companies of dump trucks which had a term of 65 months, required it to indemnify the finance companies (which were stated to retain the right of ownership) for any loss resulting from operation of the trucks, provided that the taxpayer could exercise a purchase option in the 60th month at a price slightly less than the total of the outstanding payments for the remaining five months, provided that the taxpayer continued to owe the monthly payment even if it ceased to use the property for any reason including destruction by Act of God, and provided that the taxpayer could not sell or sublet the truck without the consent of the finance companies or use them outside North America.

The majority found that subsection 248(3) was intended to treat beneficial ownership of property in the same way as various forms of ownership recognized in the civil law of Quebec, intimated that Interpretation Bulletin IT-233R, para. 3, described circumstances in which the lessee was the beneficial owner of property and found that the taxpayer in this case had acquired beneficial ownership of the trucks at the inception of the lease given that it had acquired the three incidents of ownership (possession, use and risk). Accordingly, it was entitled to claim capital cost allowance and treat a portion of the lease payments as interest expense.

The taxpayers, who were members of a joint venture, did not capitalize interest costs incurred during the construction of a grain elevator under s. 21, because they wished to avoid the prohibition in s. 127(11.2) against including such capitalized interest in the capital cost for investment tax credit purposes, and instead took the position that they were entitled to capitalize the interest on the authority of the Sherritt Gordon case, which was decided shortly before the introduction of what now is s. 21. Rothstein J.A. stated (at para. 17) that:

The rule in Sherritt Gordon cannot stand together with section 21. This Court cannot eliminate the option provided by Parliament to taxpayers under section 21 by reference to prior jurisprudence.

He went on to indicate (at para. 18) that he had "no difficulty with a proposition that in circumstances not contemplated by section 21 or other statutory provisions [e.g., situations where the interest would not qualify for deduction under ss.20(1)(c), (d) or (e)], interest may be capitalized according to GAAP."

Timber quotas which the taxpayers were deemed to have acquired after 1974 by virtue of their renewal of such rights after 1974 had a capital cost equal only to any amounts expended in acquiring those properties, rather than the market value of the quotas at the time of their renewal. Although it was correct to view the cost of an asset to a taxpayer as what he has given up to get it, when the taxpayers renewed their licences they did not give anything up but instead were exercising and enjoying their rights of renewal which they already had.

Newfoundland Light & Power Co. Ltd. v. The Queen, 90 DTC 6166 (FCA)

Ten percent of all payments due to contractors by the taxpayer for various capital improvements were not payable by it until the contracts have been substantially completed to the satisfaction of the supervising engineer, and all the claims of sub-contractors and employees have been met by the contractors. Because the taxpayer's "liability to pay the holdbacks to its contractors was merely contingent since it was dependent for its existence upon uncertain future event, namely, the acceptance of the work by the engineer" (p. 6173), the taxpayer was not entitled to include the amount of the holdbacks in the determination of the undepreciated capital cost of the properties for the year.

Hazlewood v. The Queen, 89 DTC 5537 (FCTD)

In December 1970 the taxpayer contributed $500 to become a limited partner in a partnership which operated an apartment building. For its 1970 year the partnership had revenues of $51,700 and expenses of $102,571, including CCA of $53,761, and a business loss of $7,267 was allocated to the taxpayer. The general partner reserved the right to purchase the taxpayer's shares on January 1, 1973 for $100.

The Minister's reassessment, in which the taxpayer's CCA claim was limited to an allowance based on his capital contribution of $500, was affirmed by Joyal J. "[T]here was no exposure to the plaintiff beyond the $500 capital contribution he made to the partnership."

In order to obtain a development permit to add a 72-room extension to its hotel, the taxpayer committed itself to either construct 27 additional parking stalls within 1/4 mile of the hotel, or pay the City of Edmonton $216,000. Since the payment "was clearly made either as a requirement of obtaining the building permit or as the price of the exclusive use or leasehold interest in the parking spaces promised by the City," and because the taxpayer's financial statements included the payment as part of the capital cost of the extension, the payment was part of the capital cost of a Class 3 asset, rather than an eligible capital expenditure.

Amounts expended by the taxpayer to install new pipelines were additions to the capital cost of its depreciable assets notwithstanding that it was reimbursed in whole or in part by government or private sources. Walsh J quoted (at 6304, with approval) the statement of Lord Atkin in Corp. of Birmingham v. Barnes (1935), 19 T.C. 195, at 217 (HL):

What a man pays for construction or for the purchase of a work seems to me to be the cost to him; and that whether someone has given him the money to construct or purchase for himself, or before the event has promised to give him the money after he has paid for the work, or after the event promised or given the money which recoups him what he has spent.

The Queen v. Gelber, 83 DTC 5385, [1983] CTC 381 (FCA)

It was virtually certain that, of the taxpayer's total cash investment of $38,333 for a share in a motion picture film, $30,000 would be returned to him in the form of rental income and that he would receive what, in effect, was interest on this $30,000 investment until such time as it was so repaid. It was held that notwithstanding that only $8,333 was thus truly at risk, the taxpayer could claim capital cost allowance in respect of his total outlay of $38,333.

Since the buildings on the property purchased by the taxpayer were of little value and were, in fact, an obstacle to redevelopment of the property, no capital cost was allocable to them.

Furthermore, since the only income from the property was an annual rental that was calculated solely on the basis of the valuation of the land without buildings, the buildings were not acquired for the purpose of producing income and capital cost allowance claims were therefore precluded on this ground as well.

Lipper v. The Queen, 79 DTC 5246, [1979] CTC 316 (FCTD)

It was found that a partnership, of which the taxpayer was a limited partner, had acquired two films at "a grossly and artificially inflated amount which bore no relation whatsoever to the value of the [film] assets" and that neither the purchasing partnership nor the vendor expected the unpaid portion of the purchase price ever to be paid, notwithstanding that the unpaid portion was stated to be payable 11-1/2 years after the date of the purchase. Since any liability of the taxpayer to contribute to the payment of the unpaid portion was contingent on the films generating earnings, the capital cost of the taxpayer's film interest was limited to the amounts which he had actually paid.

A partnership purchased a film in an advanced state of production for a purchase price computed as the audited cost of production to the date of purchase, payable by way of a cash payment of $150,000, the balance (of $427,892) to be paid only out of profits generated by the film. Expert accountancy evidence indicated that an amount equal to the unpaid balance of the purchase price was properly includible in the capital cost of the film in the year of purchase only if the unpaid balance was a "real" liability rather than a contingent liability. It was held to be the latter since "it was a liability (from which the [partnership] purchasers admittedly could not unilaterally withdraw) to become subject to an obligation to pay the balance if, but only if, an event occurred which was by no means certain to occur [namely, the generation of profits]."

The Court also stated:

The amounts actually paid in the future from earnings, if any, would be taken into capital cost in the years of payment.

McKee v. The Queen, 77 DTC 5345, [1977] CTC 491 (FCTD)

A syndicate in which the taxpayer had a 1/16 interest purchased an interest in a film for a cash amount plus an additional amount which was payable, at the earliest, 8 years later. There was no obligation to pay the unpaid balance when due, but if it failed to do so it would forfeit the cash payment and all rights to the film.

The capital cost of the film excluded the unpaid balance (and, for other reasons, the cash amount). "It is not even a true liability but rather a mere right to choose at some time in the future whether an undetermined amount will be paid or not and is therefore even more tenuous and nebulous than what is commonly considered a contingent liability."

Elias Rogers Co Ltd. v. MNR, 73 DTC 5030, [1972] CTC 601 (FCTD)

Jackett C.J. stated (at p. 5032) before going on to find that cost of installing water heaters leased to customers were not capital expenditures, that the cost of installing heavy plant and equipment by a business in its factory would be a capital expenditure and that "in such a case the cost of the plant and the cost of the installation is a part of the cost of the factory or other work place as improved by the plant or equipment".

MNR v. Wardean Drilling Ltd., 69 DTC 5194 (Ex Ct)

taxpayer had not acquired all the incidents of title

Before finding that the taxpayer had not "acquired" a drilling rig in its 1963 taxation year for purposes of the definition of "undepreciated capital cost" in s. 20(5)(e) of the pre-1972 Act, because under the Sale of Goods Act (Alberta), property in the drilling rig had not passed to the taxpayer until 1964, Cattanach J. stated (at p. 5198):

"... It is my opinion that a purchaser has acquired assets of a class in Schedule B when title has passed, assuming that the assets exist at that time, or when the purchaser has all the incidents of title, such as possession, use and risk, although legal title may remain in the vendor as security for the purchase price as is the commercial practice under conditional sales agreements."

Weinberger v. MNR, 64 DTC 5060 (Ex Ct)

cost of patent included legal costs and R&D

The cost to the taxpayer of a patent included the legal expenses incurred in obtaining the patent, the research-related costs of developing the taxpayer's invention prior to the application for the patent and amounts expended subsequent to the application (including costs of continued testing) attributable to satisfying the patent examiner that the patent had the utility necessary to support a patent.

See Also

The Queen v. Yelle, 2010 DTC 5128 [at 7083], 2010 ABPC 94

The taxpayers, accused of criminal evasion under s. 239(1)(a), moved for a directed verdict. The taxpayers were members of a partnership which had claimed capital cost allowance on software which the partnership had acquired for a purchase price of Cdn. $4 million from a corporation which, in turn, had acquired the software for a purchase price of U.S. $42,000 pursuant to a purchase agreement that was dated one day earlier than the agreement for the purchase of the software by the partnership. In considering a motion for a directed verdict, it was to be assumed that the Crown's factual allegations would be accepted, including the allegation that the buyer partnership and the vendor corporation were not dealing at arm's length. Before dismissing the taxpayer's motion, Fradsham J. remarked at para. 23 that, if the parties had been operating at arm's length, then the purchase price would have to be accepted for tax purposes.

Campbell J. rejected a submission of the Crown that leases acquired by the taxpayer had a nil cost to it because their acquisition was financed by the third party to whom it then disposed of the leases in satisfaction of the financing.

Although the taxpayer continued to be the legal owner of a plant, the effect of the agreements between it and the Alberta government was that "all the benefits and all the burdens that arise from the ownership" thereof rested with the Alberta government, so that it became the beneficial owner of the plant (para. 69).

A warranty provided by a vendor of software rights to the taxpayer respecting the achievement of a business plan was commercially unrealistic. The taxpayers had the right upon such breach of warranty to return the software to the vendor in satisfaction of their obligation to pay the deferred purchase price. In these circumstances "the only reasonable interpretation is that the agreement was intended by the parties to give the appellants the right to walk away from the arrangement at any time within the first year" (para. 129), so that the cost to them of the software was only its nominal value.

The position of the Minister was that a vehicle had been acquired by the taxpayer's mother and not by the taxpayer, so that the taxpayer was not entitled to claim capital cost allowance. Webb J. found that the taxpayer had acquired beneficial ownership of the automobile when the vehicle was acquired as his mother simply financed the purchase and held title as security for the debt owing by the taxpayer to her. The fact that the motor vehicle was registered in the taxpayer's name was not determinative.

Property that the vendors sold to the taxpayer contained chromium and the vendors did clean up work until the problem of contamination in runoff water was resolved to the satisfaction of the City. The property then was sold to the taxpayer for a cash payment of $25,000 and the assumption of any obligation that the vendor was under to clean up the property. The taxpayer treated the cost to it of the property as being what a valuation report (which was not put in evidence) had estimated would be the fair market value of the property if it had not been contaminated.

In holding that the cost of the property to the taxpayer was $25,000 as assessed by the Minister, Paris J. found that the taxpayer had not met the onus upon it of showing that it was under a legal obligation to expend any amount to clean up the property (and, in fact it had not done so).

Terexcavation Antoine Grant Inc. v. The Queen, 2005 DTC 709 (TCC)

The taxpayer acquired a tractor for investment tax credit purposes at the time it entered into a leasing contract for the tractor under which there was an option to purchase, rather than at the time it exercised the option to purchase, and given the jurisprudence that a leasing contract under the Quebec Civil Code was a means of acquiring property.

A partnership acquired Canadian rights to software in consideration for $960,000 in cash and an acquisition note in the amount of $12.15 million under which the interest was capitalized for the first nine years and thereafter quarterly instalments became due. In finding that the capital cost to the partnership of the software did not include the amount of the acquisition note, Archambault J. accepted the Minister's submission that the vendor and the purchasing partnership never intended there to be a legal liability under the acquisition note (or the subscription notes of the limited partners that were issued to the vendor in replacement of the acquisition note). This was corroborated by the fact that the subscription notes were never paid, that a lawsuit brought by the partnership against the vendor, which was settled by the subscription notes being replaced by limited recourse notes recoverable only against the shares of a private corporation that were worthless, was mere window dressing to accomplish this restructuring and that the fair market value of the acquired software rights was not more than $960,000.

A limited partnership purchased software from a vendor corporation in consideration for a cash payment and the issue by it of an "acquisition note". The acquisition note immediately was paid off by the partnership assigning to the vendor promissory notes that were owing to it by its limited partners as a result of their subscription for units of the partnership.

Bowman A.C.J. found that the cost to the partnership for the software was less than the stated purchase price because the promissory notes did not have a value equal to their face amount. This was the case given that the limited partners could get rid of their liability under the notes by assigning them to a third party, which could be a shell company, given that if the software did not generate a stipulated return the partnership had the right to replace the board of directors of the vendor corporation (which at a practical level would be a "formidable obstacle" to the vendor collecting on the promissory notes), and given that under the complex terms of the arrangements the limited partners would have a myriad of defences were they to be sued on the promissory notes.

Rip T.C.J. accepted the position of the Minister that a note issued by a partnership as part of the consideration for the purchase by it of software "engines" was a contingent note because interest and principal on it were payable only out of stipulated percentages of gross profits generated by the software. Accordingly, the capital cost of the software did not include the amount of the note.

Sun Life Assurance Co. of Canada v. The Queen, 97 DTC 422 (TCC)

density rights are land even if building constructed

Bowman TCJ. followed his earlier decision in Cadillac Fairview in finding that density rights purchased by the taxpayer from a nearby church were an addition to the cost of land rather than building notwithstanding accounting evidence that such expenditures should have been added to the cost of the building and notwithstanding that, unlike the other case, a building actually was constructed, stating (at p. 428):

Density rights...exist independently of their exercise and independently of any present or future building.

Cadillac Fairview Corp. Ltd. v. The Queen, 97 DTC 405 (TCC)

costs of density rights were land costs

The taxpayer expended $11.2 million in obtaining zoning changes that were desirable for the proposed Phase II of the Eaton Centre (i.e., eliminating a requirement that the development have a residential component, and obtaining a "transfer" of density rights from four City of Toronto sites and a Church) represented a cost of modifying restrictions of the rights that the taxpayer, as land owner, was subject to with respect to the use of the land.

Bowman J stated (at pp. 413-414):

[T]he right to use property, whether restricted by zoning by-laws or not, is a right that inheres in the ownership of the property. … The cost of a modification of the restrictions of the rights that a landowner has with respect to the use of land is a part of the cost of the land. …Density rights have to do with what the owner can do with the land. …

It requires something of a leap of faith to claim capital cost allowance under Class 3 on a building that does not exist and may never exist.

Accordingly, such expenditures were an addition to the cost to the taxpayer of the land, rather than being a cost of the proposed building expansion.

Lord Hoffmann stated (in obiter dicta, at p. 176) that "the wages of an electrician employed in the construction of a building by an owner who intends to retain the building as a capital investment are part of its capital cost".

Gartry v. The Queen, 94 DTC 1947 (TCC)

The taxpayer was entitled to treat expenditures made by him on a vessel before it sank and before he acquired title to it as part of the capital cost to him of a depreciable property to the extent that such expenditures were on capital account. Bowman TCJ. found (at p. 1953) that there was "the existence of a proprietary right in the property amounting to the acquisition and ownership of the property" notwithstanding the absence of the acquisition of title, given that the taxpayer had sufficient rights under the contract for the purchase of the vessel to direct the making of improvements to the vessel and given that in the particular circumstances, the taxpayer would have had a right to specific performance of the contract.

Even if this conclusion were incorrect, the taxpayer would have been considered to have acquired separate depreciable assets (i.e., the new engines, generators and hydraulic, electronic and navigational equipment and running gear installed in the vessel).

Harvey v. The Queen, 94 DTC 1910 (TCC)

The capital cost to the taxpayer of a yacht, that he bought in Canada and then had transported to the British Virgin Islands in order to be chartered on his behalf, included costs of work necessary to put the boat into shape to carry on the charter business, transportation and delivery costs, and import duties.

Gold Line Transport Ltd. v. MNR, 92 DTC 2005 (TCC)

The taxpayer acquired a truck at the time property in the truck passed to it under the New Brunswick Sale of Goods Act, rather than at the later time of delivery and registration of the truck with the Motor Vehicle Registrar.

Berhad v. Director General of Inland Revenue, [1985] BTC 578 (PC)

receipts during development reduced cost rather than being income

The taxpayer felled and extracted lumber as a necessary step in the process of developing 7,000 acres of jungle into an oil palm plantation. Sums which it realized from the sale of timber were a deduction from the cost of its plantation assets rather than income receipts.

The Queen v. Canadian Pacific Ltd., 77 DTC 5383, [1977] CTC 606 (FCA)

The full amount of expenditures which Canadian Pacific incurred to improve its property after it had been agreed that a third party would pay Canadian Pacific an amount not exceeding the amount of the expenditure, was included in the capital cost of those properties. (s.84A(3), pre-1972 Act, "expenditure incurred ... in respect of the ... renovation of depreciable property")

The taxpayer sought to deduct capital cost allowance for the cost of driving passageways into an ore body. The Court agreed with the decision of Jackett C.J., who had said that:

"The cost of such extraction operations is, in accordance with ordinary business principles, the costs of earning the profits made by selling the ore extracted from them. If that is right, there was no cost, and therefore no 'capital cost', of acquiring the haulageways."

The value of the ore extracted from the passageways exceeded the cost of opening them.

The taxpayer purchased assets (including depreciable assets) on February 1, 1962 for a purchase price which was satisfied, in part, by the delivery of four interest bearing promissory notes payable in U.S. funds one, two, three and four years after the date of purchase. The taxpayer sought to deduct CCA on the basis of the exchange rate on December 31, 1962 (Cdn. $1.08108 per U.S. $1.00) rather than the rate on February 1, 1962 (Cdn. $1.049062 per U.S. $1.00).

The submission of taxpayer's counsel that because foreign exchange fluctuations are considered to be part of the cost of purchasing inventory, they must also form part of the cost of purchasing any asset, was rejected. "[T]he expression 'capital cost to the taxpayer' as used in [s.20(1)(a)] refers to the actual, factual, or historical cost to the appellant of the depreciable property when acquired: in this case, at February 1, 1962."

if damages relate to a particular asset of a business that was not disposed of, they will reduce the asset’s cost

In 2016-0652851C6 F, as a result of breach of a purchaser's obligation to purchase a personal residence, the individual vendor received $50,000 in damages from the defaulted purchaser, which CRA stated was proceeds of disposition of a promise giving rise to a capital gain of $50,000.

In confirming its earlier position, CRA stated that although IT 365R2 provides that "where the amount of compensation relates to a particular asset that was not disposed of, the amount will serve to reduce the cost of that asset to the taxpayer," this position only applies respecting non-performance of business contracts.

1.18 A taxpayer might incur costs for architectural and engineering services used in preparing plans and estimates for a new building or for other construction work of a capital nature. Such costs are capital expenditures that would normally be added to a particular class… .

Costs of acquisition

1.45 The term capital cost of property generally means the taxpayer's full cost of acquiring the property and includes:

legal, accounting, engineering or other fees incurred to acquire the property;

site preparation, delivery, installation, testing or other costs incurred to put the property into service; and

in the case of a property a taxpayer manufactures for their own use, material, labour and overhead costs reasonably attributable to the property, but not any profit which might have been earned had the asset been sold.

Time of acquisition

1.28 Generally, a taxpayer will be considered to have acquired a depreciable property at the earlier of:

the date on which title to it is obtained; and

the date on which the taxpayer has all the incidents of ownership such as possession, use, and risk, even if the vendor retains legal title as security for the purchase price (as is commercial practice under a conditional sale agreement).

In order that the cost of an asset may fall within a specified class, the purchaser must have a current ownership right in the asset itself and not merely rights under a contract to acquire the asset in the future.

1.29 … The basic rule is that property is acquired by a purchaser at the time the parties to the contract intend it to be acquired. …

1.30 However, if the intention of the parties is not evidenced as discussed above, the following rules apply to determine when ownership of a property is acquired:

Where there is an unconditional contract for the sale of a specific asset in a deliverable state, property will be acquired by the purchaser when the contract is made. …

If there is a contract for the sale of a specific asset and the seller is bound to do something to the asset to put it into a deliverable state, then ownership of the property is not acquired until the seller has satisfied any outstanding conditions and the purchaser has been notified. This is also the case where the asset is in a deliverable state, but the seller must weigh, measure, test or do some other act or thing to ascertain the price.

Trade-ins (s.12(33)

1.47 In some cases a person may acquire depreciable property for consideration that includes a transfer of other property (for example, a trade-in). Subsection 13(33) provides that for property acquired after November of 1992 the portion of the cost attributable to the transfer shall not exceed the fair market value of the transferred property.

Cost of demolishing old building

1.55 If an old building used by a taxpayer for a long time to earn income is demolished to build a new one, the cost of demolition is not considered to be part of the capital cost of the new building (unless the taxpayer so desires), but may be deducted as an expense in the year.

Determination of cost

1.57 …[T]he taxpayer is considered to have acquired a building or other structure, at any particular time, to the extent of:

the construction costs incurred by the taxpayer to that time, including the cost to the taxpayer of materials that have been put in place, but not including holdbacks that constitute a conditional liability (for example, a holdback which requires that the work be approved by the taxpayer's architect or engineer before payment), or

progress billings received by the taxpayer to that time, net of any holdbacks that constitute a conditional liability.

Negotiated reduction in purchase price

1.59 Where a taxpayer acquires depreciable property and at a later date the vendor agrees to reduce the amount owing under a negotiated adjustment of the purchase price, the capital cost of the property is reduced by the amount of the reduction at the beginning of the tax year in which the price adjustment took place. …

The Quebec government subsidizes electric vehicle purchases through the payment of a rebate directly to a participating car dealer., this assistance is actually a deposit paid or to be paid to the dealer on the purchase or lease. What is the incidence of the subsidy on CCA where the pre-tax cost of the vehicle is $25,000, $35,000 or $45,000? After noting that such assistance did not reduce the cost of the vehicle for purposes of s. 6(2), CRA went on to find that it reduced the capital cost of the vehicle to the purchaser for CCA purposes under s. 13(7)(g), stating that "the capital cost of the electric vehicle will be the same whether the amount of assistance is paid directly to the participant or the participant authorizes the government to pay the amount of the assistance to a partner dealer."

1.20 If a fine or penalty is incurred in connection with the acquisition of an asset for which capital cost allowance (CCA) may be claimed, the fine or penalty may be included in the capital cost of that asset (or the CCA class to which the asset belongs).

lease under which lessee bore all risk implicitly treated as lease rather than purchase

A corporation ("Employer") leases automobiles from an arm’s length lessor ("Leasing Corporation") and provides the automobiles to employees. Under the lease terms, in the event of cessation of use of an automobile (e.g., from theft), and on the return of the automobile on termination of the lease, the Employer receives a credit or must pay a deficiency based on comparing the sale price to the residual value stated in the lease. Before going on to analyse the effect of these credits or debits on the basis that the leases were leases, CRA stated:

[I]n the absence of sham … for the purposes of the Act a lease agreement is a lease agreement and a sale contract is a sale contract. … [A] recharacterization is only possible where the taxpayer's characterization of the transaction does not adequately reflect its actual legal effects. …[T]he determination of the nature of the contractual relationship between the Employer and the Leasing Corporation is one of fact and law to be considered by the parties.

In response to a question as to whether montly lease payments under a five-year lease with a purchase option of $X would be deductible, CRA stated:

A sale agreement between the parties can contemplate only one owner of the property in question. Thus, whether the transaction is a lease or a sale, only one party is entitled to the capital cost allowance and any related investment tax credits. In addition, if the lessee deducts a lease payment as a current expense, then the lessor would be expected to include the corresponding lease payment into the current taxation year's income.... If a lease agreement includes a bargain purchase option, it would not necessarily change the nature of the transaction. Some concerns with respect to leases with options were alleviated by the introduction of subsection 13(5.2) of the Act

16 December 2003 External T.I. 2002-013366 -

(See also 5 December 2003 TI 2002-015757): With respect to the situation where a "lender" financed the purchase from a third-party vendor of property by a purchaser under a lease under which title to the asset automatically passed to the purchaser when all or substantially all the lease payments had been made to the lender, CCRA stated that it was a question of fact whether an automatic transfer at the end of a lease is a sale at the inception of the lease, and that "where the automatic transfer of title upon receipt of the last payment is in fact a right to purchase the property at the expiry of the agreement if the lessee has met all the conditions under the agreement, absent a sham, we will not consider that a sale has in fact occurred until the right to purchase is exercised. However, in our opinion, a portion of the lease payments will be in respect of the right to purchase the property in the future where the periodic lease payments require larger payments than a comparative lease without such an automatic transfer of property".

2001 Ruling 2000-003987 -

A sublease was found to be a lease transaction because this was its legal form and legal substance. There was no option to purchase, and the risks and obligations substantially remained with the sublessor. However, an "Initial Lease Payment" made pursuant to the sublease was ruled to be part of the cost of a leasehold interest rather than deductible rent given that the taxpayer could not demonstrate that the annual rentals under the sublease agreement were substantially lower than fair market value rentals, the initial lease payment was non-refundable in the case of early termination and it was subject to various adjustments on the closing date which had nothing to do with the annual use of the facilities under the sublease.

20 January 1999 T.I. 983230

"Generally, we will rely on the assumption that the form of a particular lease agreement reflects the true relationship between the parties so that the lease would be treated as a lease for the purposes of the Act."

17 April 1998 External T.I. 5-972078 -

Where a payment is made to a person who has purchased the rights to a patent once it is granted, the payment is included in the purchaser's capital cost of the patent, but no amount may be claimed for CCA until the patent is granted.

10 February 1997 Internal T.I. 7-970127 -

Because a condition precedent under an agreement for purchase and sale of a depreciable asset had not yet been satisfied, there was no addition to the undepreciated capital cost of the relevant class.

9 June 1995 External T.I. 5-951145 -

"... When a business is sold and contingent liabilities of the vendor are assumed by the purchaser as part of the consideration of the sale price, it is the Department's position that there is neither a deduction to the vendor nor a cost of acquisition to the purchaser in respect of the contingent liabilities assumed ... . An amount contingently payable for an asset does not form part of the cost of the asset sold until the contingency has been met."

14 August 1992 T.I. 921331 (May 1993 Access Letter, p. 192, ¶C20-070)

Software is acquired by a person where there has been an absolute transfer of all intellectual property interests in the software and where the transferee obtains an unrestricted right to sell or lease the software.

10 January 1991 Memorandum (Tax Window, Prelim. No. 3, p. 31, ¶1084)

The amount of GST payable on the purchase of depreciable property may be included in the capital cost of the property, with input tax credits of the taxpayer reducing that capital cost pursuant to ss.248(16) and 13(7.1).

"soft costs do not include those items, such as the cost of building permits, site preparation, architectural and engineering fees, costs of direct materials, labour and related overheads, builders' risk insurance premiums, etc. which would normally be included in the capital cost of a building."

84 C.R. - Q.74

Whether the capital cost of assets financed with limited-recourse loans will be adjusted depends on the facts of the particular case.

81 CR - Q.23

The cost of property to a person cannot exceed the lesser of the purchase price of the property acquired and the amount put "at risk" by the taxpayer. A taxpayer will be at risk in the amount of a limited recourse loan where the funds for repayment of the loan will be generated from the current business of the taxpayer, the lender is an arm's length person and the taxpayer has a net fair market value equity in the property.

Where the acquisition of a certified production is financed by the issue of a non-interest bearing note, the note must be discounted to reflect its present value in determining the capital cost of the production.

IT-477, para. 20

Where expenses related to the acquisition of a Class 14 property are incurred in the year prior to the year in which the property is acquired, they will be added to the capital cost of the property in the year of its acquisition.

E

See Also

An amalgamation of two credit unions that did not qualify as an amalgamation under s. 87(1) nonetheless resulted in the amalgamated corporation having its undepreciated capital cost reduced by depreciation claims made by its predecessors, given that at corporate law the amalgamation was a continuation of the predecessors.

The Court of Appeal found that the amalgamation did fall under s. 87(1), but affirmed in the alternative that the amalgamation was a continuation of its predecessors. The Supreme Court affirmed that s. 87(1) applied (with different reasons), and therefore it was unnecessary to determine the consequences if it did not.

Administrative Policy

negative UCC balance arising in statute-barred year becomes recapture in 1st open year

If, as a result of the erroneous inclusion of acquired property (e.g., property which was not acquired for an income-producing purpose) in a class of depreciable property the bogus CCA claims thereon cause the UCC of the class, on a proper determination, to have become a negative amount, CRA now considers that the negative balance for the class will be recognized as recapture of depreciation in the first year following the acquisition which is not statute-barred. Before so concluding, CRA stated:

CRA may recalculate and correct the UCC of a prescribed class as of the beginning of the first non-statute-barred year by using the revised capital cost (rather than the original capital cost) of the property for the purposes of element "A" of the UCC definition. …[S]ee, for example, New St. James Limited v. M.N.R., 66 DTC 5241 (Exch.); Coastal Construction and Excavating Limited v. The Queen, 97 DTC 26 (TCC); The Queen v. Papiers Cascades Cabano Inc., 2008 DTC 6264 (FCA); and Leola Purdy, Sons Ltd. v. Canada, 2009 DTC 1042 (TCC).

…[T]he reference [in E] to "total depreciation allowed"… is considered to be a reference to the amount of CCA actually deducted and allowed on assessment in computing the taxpayer's income. This position is based on the Federal Court of Appeal's decision in The Dominion of Canada General Insurance Company v. The Queen, 86 DTC 6154… .

F

See Also

The taxpayers purported to buy interest in a U.S. partnership owning a computer whose original capital cost had been completely depreciated for U.S. tax purposes and which currently had a nominal fair market value. Bowie T.C.J. found that if the partnership had continued to exist after their purported purchase of the interest, the undepreciated capital cost of the computer for Canadian income tax purposes would have been its full historical cost.

purported new partners in loss partnership did not carry on on business in common

155

Wang Canada Ltd. v. MNR, 91 DTC 1279 (TCC)

The taxpayer had acquired computer equipment, claimed capital cost allowance and then in a subsequent year disposed of the equipment on income account. Bonner J. accepted the Crown's contention that the undepreciated capital cost of the relevant class of assets (Class 10) should be reduced by the net book value of the assets which were sold (which approximated their proportionate undepreciated capital cost for tax purposes) and that the difference between the proceeds of disposition and the amount of the reduction to the undepreciated capital cost of the class should be taxed as ordinary income. In other words, the rule in s. 13(21)(f)(iv) did not affect the computation of the profit from the sale of the equipment.

Administrative Policy

The 4% GST penalty paid by a vendor of depreciable property in a "wash transaction" would be deducted from the proceeds of sale of the depreciable property in determining the decrease to the undepreciated capital cost of the particular class.

G

Cases

It was noted, obiter, that "it may be argued that a negative amount could enter into the calculation ... under section 13(21)(f)(v) if the costs of the disposition of a property exceeded the proceeds of the sale of that property". [C.R.: 257]

Vessel

Administrative Policy

Before finding that a floating home qualified as a vessel as defined in the Canada Shipping Act, 2001, CRA stated:

Subsection 13(21) defines a vessel (“navire”) as “a vessel within the meaning of the Canada Shipping Act. However, that Act was repealed in 2001 and replaced by the Canada Shipping Act, 2001. Paragraph 44(h) of the Interpretation Act respecting the interpretation of statutes and regulations provides that any reference in an unrepealed enactment to the former enactment will, with respect to a subsequent transaction, matter or thing, be read and construed as a reference to the provisions of the new enactment relating to the same subject matter.

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